Laws of the People's Republic of China

the State Administration of Taxation

Reply of the State Administration of Taxation on the Issue Regarding the Collection of Taxes on the Operation Maintenance and Consulting Service of the Information System as Provided by A Foreign Enterprise within China

Guo Shui Han [2005] No. 912

The local taxation bureau of Guangdong Province:

The Request of your bureau for Instructions on the Issue Regarding the Collection of Taxes on the Operation Maintenance and Consulting Service of the Information System as Provided by a Foreign Enterprise within China has been received. It has been known that the Epcos Germany has concluded an Agreement on IT Operation, Maintenance and Consulting Service with its subsidiaries all over the world to provide operation, maintenance and consulting services for its information system as well as the relevant software for its subsidiaries all over the world, including the Epcos (Zhuhai FTZ) Co. Ltd and the Epcos (Zhuhai) Co. Ltd (hereinafter referred to as "Chinese users"), in Germany. As for the payment of expenses, the Epcos Germany is responsible for arranging its technicians to provide services inside and outside the territory of China in a uniform manner and advancing the relevant expenses, and then collect service fees from its users as well as software expenses therefrom for its advance payment. We hereby give our reply on the issue regarding the taxation of service fees as collected by the Epcos Germany as well as the software expenses advanced by the Epcos Germany as follows:

1.

The abovementioned business of the Epcos Germany are a kind of provision of support, maintenance and consulting services for the normal operation of the established information systems of Chinese users, including the relevant software as transferred by it. The technical services, for which the relevant technical service charge as provided for in the provisions in force shall be incorporated as royalties to form the basis for the collection (withholding) of income tax, refers to labor services such as instructing, guiding and training in the transfer of special techniques. Therefore, as for service charge as derived by the Epcos Germany from the abovementioned business, the relevant taxes shall be collected in light of the different circumstances. As for the service charge from the services that are provided outside the territory of China, the business tax and enterprise income tax may be exempted. As for the service charge from services that are provided within the territory of China, the business tax and income tax shall be paid in accordance with the Interim Regulations of the People's Republic of China on Business Tax and the Law of the People's Republic of China on the Income Tax of Foreign-funded Enterprises and Foreign Enterprises as well as the relevant provisions of Articles 3 and 7 of the Agreement between the People's Republic of China and the Federal Republic of Germany on Taxation.

2.

As for the fees of the software provided by an enterprise outside the territory of China to Chinese users, which are collected by the Epcos Germany for its advanced payment, the business tax and enterprise income tax shall be respectively collected on such fees as is levied on the incomes derived from the transfer of intangible assets and royalties in accordance with Article 7 of the Detailed Rules for Implementing the Interim Regulations of the People's Republic of China on Business Tax and Article 19 of the Law of the People's Republic of China on the Income Tax of Foreign-funded Enterprises and Foreign Enterprises. As for any technical transfer that meets the requirements for exempting taxes from business income as prescribed in the Circular of the Ministry of Finance and the State Administration of Taxation concerning the Taxation Issues on Implementing the Decision of the State Council of the Central Government on Intensifying Technical Innovation, Developing High Technologies and Achieving Industrialization (Cai Shui Zi [1999] No. 273), the business tax may be exempted in accordance with the provisions of the aforesaid Circular.

3.

The enterprise shall define the aforesaid incomes accurately and reasonably, calculate and pay the relevant taxes. As for any income that has been unreasonably defined or that cannot be defined according to the actual situation, the competent tax authority may adopt the reasonable methods for determining the proportion so as to identify the taxable incomes.

the State Administration of Taxation

September 25, 2005